Question

Ralph Reed, who turned 65 in December of 2018 and his wife, Mary, the older woman at 67, have been married for 40 years. They support several family members including Ralph's parents who live down the street, two teenage girls still in high school (under 16) and a son, 22, just finishing graduate school. Ralph, though long suffering, has been paying more than 50% of their support, if not all 100%, throughout 2017.

            Ralph works full-time and receives a salary of $145,000. In 2018, before the Christmas break, he also received a bonus check of $30,000, which he did not deposit until January 2, 2019. Only $8,000 of Federal Income Tax was withheld from his paychecks, since they only owed $7,900 in taxes in 2017.

            Ralph and Mary received interest of $5,500 on several mutual funds. In addition, they received $700 of interest on Pittsburgh Stadium Bonds.

            After spending $2,000 in lottery tickets during the year, Mary had Bingo winnings of $1,000 in the big jackpot in December of 2017.

            Mary settled a lawsuit successfully and received $2,000 in compensation for injuries and $5,000 in punitive damages.

            Ralph sold two blocks of stock held over two years. One had a gain of $2,000 and the other had a loss of $6,000.

            Ralph also has the following unreimbursed employee business expenses related to his position working for a very miserly boss:

            Internet connection to work from home one day per week                $50/month

            Books, Publications and Subscriptions to keep current in field         $1,000

            Two trips to visit clients

                        Trip A              $500 Airfare, $300 Hotel, $700 Meals & Entertainment, $200 Golf Games

                        Trip B              $300 Rental Car, $200 Meals

Ralph and Mary had the following additional expenses related to itemized deductions:

                        State and Local Tax Withheld                         $7,000

                        Mortgage Interest                                          4,000

                        Real Estate Taxes                                        5,000

                        Charitable Contributions - Cash                   2,000

                        Medical Expenses                                        5,000

                        Tax Preparation Fees                                    1,000

They also paid $10,000 for their parents’ medical bills.

                        Based on this information, please do the following:

1. Calculate Taxable Income and 2018 Federal Taxes in total and owed.
2. Show the incremental and average tax rate.
3. Determine if they are subject to a penalty or not for underpayment of their 2018 taxes.

            Show all work. To insure proper credit, please supply the following pieces of information:

            Marital Status

            Gross Income items (by line on 1040 if it helps you)

            Deductions for AGI

            AGI

            Standard Vs Itemized Deductions

            Personal and Dependency Exemptions

            Taxable Income

            Taxes

            Taxes Owed or Refund Due

Answer 1